Why This IT Stock is Headed For its Biggest Fall in 7 Years

HCL Tech’s second warning in six months rattled investors

HCL Technologies shares plunged 15 per cent to Rs 834.85 on Thursday in its biggest one-day fall since January 7, 2009. The sharp selloff was on account of HCL Tech’s Wednesday warning about the possibility of “tepid” revenue growth in the September quarter. HCL Tech, India’s fourth largest outsourcer, was the worst performer in the 50-share blue chip Nifty index.

Here are 10 things to know about HCL Tech’s revenue warning

1) HCL warned that its Q1 revenue will be lower-than-expected because of adverse currency impact, client specific issue (revenue loss of $20 million on account of client disengagement) and slowdown in its most critical infrastructure management services (IMS) vertical.

2) HCL Tech’s second warning (first was in April 2015) in six months rattled investors, sending the company’s shares sharply lower. Fund manager Sandip Sabharwal termed HCL Tech’s warning as “crazy”, given the sharp depreciation in the rupee during the September quarter. IT companies get a major portion of their revenue in dollars, so rupee depreciation leads to translation gains.

3) The September quarter will mark the third consecutive quarter of earnings downgrade at HCL Tech, said Kawaljeet Saluja of Kotak Institutional Equities.

4) The revenue warning means HCL Tech will be the weakest performer among top 4 IT firms in the September quarter, analysts said. According to Bank of America Merrill Lynch’s Kunal Tayal, HCL Tech will post 1.5 per cent sequential growth in constant currency revenue and an operating (ebit) margin of 20.3 per cent in the September quarter.

5) HCL Tech’s case is a standalone one and will not impact the overall IT sector, said Rumit Dugar and Saumya Shrivastava of Religare. However, they noted that the frequency of client program disputes has been increasing of late.

6) Domestic brokerage Nirmal Bang’s Girish Pai said HCL Tech has little control over cross currency issues, but the other two factors (client disengagement and lumpy growth in IMS) are probably more serious and require a greater scrutiny.

7) The slowdown in HCL Tech’s IMS vertical (because of competition from other Tier-1 players) is worrisome because it is the biggest revenue generator for HCL Tech, analysts noted.

8) According to Kotak, HCL Tech has weak applications portfolio and it also lags competition in the fast-growing, high-margin digital space, Kotak added. These factors are likely to weigh on HCL Tech shares.

9) HCL Tech’s loss proved gainful for other IT stocks such as Infosys and Tata Consultancy Services, which saw buying on Thursday. HCL had outperformed TCS and Infosys in last one year; As of Wednesday’s close, TCS was up 1.2 per cent year-to-date, while Infosys was up 18 per cent while HCL Tech gained 23 per cent.

10) Kotak retained its “reduce” call on HCL Tech and cut its target price from Rs 900 to Rs 875; Nirmal Bang also cut its target price on HCL Tech from Rs 1,008 to Rs 991. However, the brokerage retained its “accumulate” rating on HCL Tech terming the revenue warning as an “aberration”.

(With inputs from Reuters)